CHAPTER 1 Local Government Budgeting: Albania Alma Gurraj Artan Hoxha Auron Pasha Genc Ruli Qamil Talka Irma Tanku
LOCAL GOVERNMENT BUDGETING PART II 104
LOCAL GOVERNMENT BUDGETING ALBANIA Table of Contents 1. Local Government System... 107 1.1 Introduction... 107 1.2 Reforming the Local Government System... 108 1.3 Local Administration... 110 1.3.1 Structure of the Local Government System... 111 1.3.2 Legal Competencies of Local Government... 113 1.3.3 Relations to the Central Administration... 117 1.4 Local Government Functions and Service Delivery... 118 1.4.1 Municipality Functions and Competencies... 118 1.4.2 Functions and Competencies of the Region... 120 1.5 Local Government Finances and Financial Management... 122 2. Local Government Budgeting (Fiscal Planning)... 127 2.1 Strategic Planning and Short-Term Budgeting at the Local Level... 127 2.2 Capital Budgeting... 128 2.3 Basic Structure of the Local Budget... 129 2.4 Participants in Local Budget Preparation... 133 2.5 Major Stages of Budgeting... 136 2.6 Budget Implementation... 140 2.7 Information on the Budget... 142 2.8 Reporting on the Budget... 144 2.9 Auditing System... 145 3. Main Conclusions and Recommendations... 146 Notes... 151 Bibliography... 152 Legislation... 152 105
LOCAL GOVERNMENT BUDGETING PART II List of Tables and Figures Table 1.1: Role of Local Government in the Macro-Economy... 110 Table 1.2: Total Expenditure by Functions... 122 Table 1.3: Revenues of the Municipalities... 123 Table 1.4: Revenues from Local Taxes and Fees... 123 Figure 1.1:The Organizational Structure of Local Governance and the Responsibilities of their Respective Bodies... 115 Figure 1.2:Bodies at the Regional Level... 116 106
LOCAL GOVERNMENT BUDGETING ALBANIA Local Government Budgeting Albania Alma Gurraj Artan Hoxha Auron Pasha Genc Ruli Qamil Talka Irma Tanku 1. LOCAL GOVERNMENT SYSTEM 1.1 Introduction Since the start of the transition, Albania has progressed through several severe economic and political maelstroms. During the last three years, progress has been made in the achievement of macro-economic stability. Despite this, Albania continues to have one of the lowest levels of per capita income in Europe and the poverty level remains high. The fiscal situation is improving, but it remains the primary issue to be addressed in the near future. A new agreement with the International Monetary Fund (the Poverty Reduction and Growth Facility) has been signed. A second important related policy initiative, the Medium-Term Expenditure Framework, is being carried out in conjunction with the World Bank. Albania has no history of political pluralism and has little developed civil society infrastructure. Political fighting between the two main political parties is intense. For the last few years, about 80% of the local government units have been under the control of the Democratic Party, while the Socialist party has controlled the national government. Despite this highly charged political environment, a number of important steps toward decentralization have been undertaken since 1999. The reform of 1992 set up politically autonomous local governments for the first time and, as a result, the whole system of local governance began to shift to a more decentralized and autonomous model. This must be viewed as a very important achievement in Albania. Some of the services and functions, from which the public benefits directly, were passed to the local bodies. However, though politically autonomous, these local bodies still lacked real administrative and fiscal autonomy in addition to the necessary authority and tools needed for implementation. In addition, the main steps undertaken were based mainly on centralized political objectives. A new Constitution was adopted in 1998 and the European Charter of Local Self- Governance was signed and ratified in 1999. This clearly indicates that Albania has committed itself to decentralize government operations. The most significant action 107
LOCAL GOVERNMENT BUDGETING PART II taken has been the adoption by the national government of the National Strategy for Decentralization and Local Autonomy. This strategy lays out a plan for the delegation of authority from the central to the local government. Implementation of the strategy holds out the promise of moving government decision-making closer to the citizens, thus giving them more control over the future development of their own communities. However, many hurdles must be overcome before decentralization becomes a reality. Laws, and the accompanying regulations needed to implement them, must be formulated and adopted; local officials need to be capable of assuming new responsibilities; citizens must be encouraged to participate in local government and an organizational capacity must be established to represent the interests of local government in national policy deliberations. The research team consisted of specialists from the Institute for Development Research and Alternatives (IDRA) and the Institute for Contemporary Studies (ICS). For the following research, the IDRA and ICS team selected three local governments, which differed in status and other factors (size, population, degree of urbanization, etc). These three units are: Tirana Municipality because of its size (almost one-third of the Albanian population is situated in it) and importance as the capital city of Albania, Kamza Municipality a municipality of the first category, Baldushku Commune there are several differences in the way a municipality and a commune operates, so we want to explore both of them for the purposes of this analysis. 1.2 Reforming the Local Government System The ratification of the Albanian Constitution in November 1998 created new possibilities for local governments. The main provision (Article 108) of the Albanian Constitution defines the following: Local government in the Republic of Albania is based on the principles of the decentralization of power and of autonomy. Article 108/ 3 defines communes and municipalities as basic units of local government. The local government units are legal entities and have an independent budget. 1 Article 109/1 defines the local councils as the representative organs of communes and municipalities, whose members are elected every three years by general direct elections and anonymous voting. On the other hand, the mayor is designated by the executive body of the municipalities/communes. The municipalities/communes directly administer all local issues within their jurisdiction. In addition, they have the right to levy local taxes in accordance with the law and to exercise their property rights. 108
LOCAL GOVERNMENT BUDGETING ALBANIA The Constitution defines a new level in the organization of local government: the regions, which function as a second level of the local government system. In January 2000, the government approved the National Decentralization Strategy. The objective of this strategy is to take full advantage of the opportunity provided by the new Constitution to create, promote and implement a new vision of local government. It is important to recognize that the legal framework of the local government system consists of many laws that function together. This framework covers the following major subject areas: Framework of local government organization, Framework for central-local government fiscal relations, Framework for the operation of local public property and enterprises, Legislation that elaborates specific powers of local governments. Although recently there have been improvements in economic performance, the country is still in the process of recovering from a series of shocks that slowed economic growth. The fiscal situation is precarious, personal incomes remain low and poverty is still a significant problem. Current expenditures exceed domestic revenues and the large amounts of accumulated public sector debt results in a situation where interest payments amount to more than a quarter of current expenditures. The government also faces difficult fiscal choices related to meeting the widespread public needs with limited resources. Decentralization, with increased powers and responsibilities transferred to local governments, requires a rearrangement of fiscal flows. Indeed, experience to now suggests that it will take several years to accomplish this fully. 2 To aid in overcoming these difficulties, the government has entered into a Poverty Reduction and Growth Facility agreement with the International Monetary Fund and has agreed to achieve certain macro-economic and policy targets. 3 Several points are linked to local government functions. One critical aspect is that the preparation process is highly participatory in nature. It is also anticipated that local governments should and will be heavily involved in strategy. This will have an impact on the budgeting process at the local level, which will be more closely linked to some general strategic goals. In addition, the government has introduced the Medium-Term Expenditure Framework, which is being carried out in conjunction with the World Bank. The framework is intended to provide greater predictability in budget planning by allowing both investment and recurring expenditures to be planned in a rolling three-year program. It would also explicitly link expenditure allocations to government policies and strategies. However, there are still unresolved questions concerning how this framework is to be linked to local government budgets. 109
LOCAL GOVERNMENT BUDGETING PART II Table 1.1 Role of Local Government in the Macro-Economy [Millions of Lek] Indices 1995 1996 1997 1998 1999 GDP 229,700 281,000 341,000 460,600 506,205 4 State budget expenditures (SBE) 77,134 87,569 100,730 141,628 165,692 [%] SBE to GDP 33.60 31.20 29.50 30.70 32.73 Total local expenditures (TLE) 5 20,705 20,691 20,143 25,756 34,103 Conditional transfers 20,484 20,066 19,515 25,034 27,047 Block grant (BG) 5,699 Own local expenditures (OLE) 6 221 625 628 792 1,357 [%] TLE to SBE 26.84 23.62 20.00 18.24 20.58 [%] TLE to GDP 9.01 7.36 5.89 5.61 6.74 [%] OLE to TLE 1.07 3.02 3.12 3.07 3.98 [%] (OLE+BG) to TLE 1.07 3.02 3.12 3.07 20.69 [%] (OLE+BG) to GDP 0.10 0.22 0.18 0.17 1.39 The share of total local government expenditures in the state budget expenditures shows a high ratio (27% in 1995, but decreasing to about 21% in 1999), but in fact it does not provide real autonomy for local governments in their decisions on expenditures. Two types of expenditures were usually included in the conditional transfers: transfers for salaries and transfers for investments. At least 80% of the conditional transfers are for the payment of salaries, (such as for educational staff) and the local governments act only as the paying agent and have no other role or possibility for decision-making. 1.3 Local Administration The first law approved in accordance with the National Decentralization Strategy was the Law On the organization and Functioning of Local Government, No. 8652, dated July 31, 2000, that became effective on the local government elections day (October 1, 2000). Its aim is to create a functional system by determining clearly four components of local government: the functions and responsibilities, the finances, the properties and the organizational structures. The law defines and regulates: Principles governing local governments (municipalities/communes and regions), Typology of functions (exclusive, shared, delegated), 110
LOCAL GOVERNMENT BUDGETING ALBANIA Related typology of authority, Financial authority of the local governments (i.e., budgeting and fiscal), Internal organization and allocation of authority, Territorial reorganization of the local governments, Timetable for implementation. 1.3.1 Structure of the Local Government System The Law on the Territorial and Administrative Division of Local Government Units in the Republic of Albania, No. 8653, dated July 31, 2000, defines all regions, muni-cipalities and communes in the Republic of Albania following a specific format. According to the law, there are 12 regions, 36 districts (sub-divisions of a region), 65 municipalities and 309 communes in Albania. First Level The basic units of the local government system are the communes and municipalities, which are considered to be the first level. They have similar public responsibilities and possess similar types of authority and competence. The only difference between them comes from the fact that they act in rural and urban areas, respectively. A commune represents a territorial and administrative unit. It is a community in rural areas and in specified urban areas. The law determines the size, name and center of the commune. Sub-divisions of a commune are called villages and, in some special cases, towns. The council of the commune determines any territory of a sub-division. A municipality represents a territorial and administrative unit. It is a community in an urban area or, in specific cases, in rural areas. Sub-divisions of a municipality in an urban area are quarters, which must have more than 15,000 inhabitants. Rural subunits of a municipality are called villages and must have more than 200 inhabitants. The towns are established by law. 7 Based on the number of inhabitants and territorial size, local government units in Albania have been categorized into four classes. Based on this categorization, a different number of personnel, different organizational structure, salary levels and costs for the administration are established. In fact, this categorization has served as a formula for the distribution of central funds. (Once the Law Concerning Intergovernmental Fiscal Relations has been approved, this categorization will be replaced because of the new formulation for the distribution of funds.) Local government elections are held every three years by general direct elections with anonymous voting. The mayors, the heads of communes and the members of the councils of municipalities and communes are elected by the inhabitants with the right 111
LOCAL GOVERNMENT BUDGETING PART II to vote. The size of the council of a municipality/commune is based on the number of inhabitants of the entities (the Law Concerning the Organization and Functioning of Local Government, Article 24). Second Level A Rregion is the second level of local government. It represents a territorial and administrative unit, which is composed of communes and municipalities with geographic, traditional, economic and social ties as well as joint interests. The borders of a region correspond with the borders of the communes and municipalities that are included in it. Sub-divisions of a region are called districts. 8 The representative organ of a region is the council of the region, which consists of representatives from elected bodies of the communes and municipalities in proportion to the number of inhabitants, but with a minimum of at least one representative. The mayor and the heads of communes in the region are always members of the council of the region. The number of the representatives from the municipalities and communes in the council of a region is set in proportion to the number of residents in the municipality or commune in the region (The Law Concerning the Organization and Functioning of Local Government, Article 50). Tirana Municipality Status The population of the capital, Tirana, exploded from 320,000 in 1992 to more than 900,000 in 2000. As a dynamic area of growth and the main economic center of the country, the potential is good for revenue growth in the city. Tirana s total independent budget revenues collected directly by the city agencies have increased since 1994. The reasons for this increase are due partly to increased economic activity in Tirana and partly to improved efforts by the city tax collection agency to collect taxes. 9 Since October 2000, the organization and functioning of the Tirana Municipality is based on a special law (No. 8684, dated July 31, 2000), which sub-divides Tirana into eleven municipal units, the heads of which are elected directly by the inhabitants. 10 The structure of these units is the same as that of a municipality, with each having both a unit council and unit head. All of these units are under the authority of the mayor of Tirana. The budget of a municipal unit is financed partly from own revenues and partly from the Tirana Municipality Budget which is decided by the municipal council. The municipal units of Tirana do not possess fiscal authority. They lack sufficient funds to carry out their tasks as defined by law because the Municipality of Tirana uses the majority of funds, and a strategic plan for Tirana does not exist. 112
LOCAL GOVERNMENT BUDGETING ALBANIA 1.3.2 Legal Competencies of Local Government The current legal framework defines the rights and duties of every local goverment level. Right of governance: a local government can issue directives, orders and ordinances, all of which are obligatory for all entities within its jurisdiction. They can take any necessary measures for carrying out their functions. To conduct their activities, local governments can create administrative structures to carry out their functions and exercise their powers, in compliance with the laws in force. As they deem necessary to carry out specific functions, the local government can establish economic units and other institutions under their authority as well as create committees, boards and commissions. They also may create any administrative or territorial sub-division within their jurisdiction to perform functions of government, as set forth in the Law. Property rights: Laws give property rights to the local authorities, but in reality they do not currently own any personal or real property, since the central government owns all assets. This right will be transferred to local governments only after the passage of the Law Concerning the Transfer of Real Property, which is currently under discussion in parliament. The right of fiscal autonomy: local governments may collect revenues and make expenditures related to the execution of their functions. They can levy taxes and fees in compliance with the legislation in force and the interest of the community. Local governments have the right to adopt and execute their budget. There will be only a single unified local budget in contrast to the two budgets that existed before the current law (concerning the independent and conditional budget) was approved. Both the unconditional and conditional transfers will be reflected in the unified local budget. Economic development right: local governments have the right to undertake economic development initiatives in the interest of their residents, if these activities do not contradict the fundamental direction of the economic policy of the state. The major part of revenues coming from economic activities of local governments must be used to provide public functions. The economic activity of the local government units is regulated by legislation on economic activities. In truth, Albanian local government units have little experience in managing such economic activities. Up to now, they have only dealt with some minor activities regarding different transactions necessary to perform some of their exclusive functions. However, this was not significant. 113
LOCAL GOVERNMENT BUDGETING PART II The right of cooperation: local governments have the right to carry out specific functions on behalf of and for the benefit of their residents. Two or more units of local government may perform any task assigned to them by law by implementing mutual agreements or contracts, by delegating specific competencies and/or responsibilities to each other or by contracting with a third party. Local governments may collaborate with similar units of local government in other countries and they are also represented in international organizations relating to local governments, in accordance with special legislation. However, in reality such practices do not currently exist, since the related financial issues have not been cleared and defined. Local government units have the right to be organized in associations in conformity with the legislation for associations. Up to now, two main associations are clear examples of the right of local governments to cooperate. They are the Albanian Association of Municipalities, whose head is the mayor of the Tirana Municipality, and the Association of the Heads of Communes. They were established in order to facilitate cooperation among local governments in Albania and to find mutual ways of increasing the effectiveness of the functions exercised. These associations have played a significant role both in the design of the National Strategy of Decentralization as well as in the drafting of the related new laws. In addition, they are active to some extent in the organization of training for newly elected local and administrative staff. The association is working with many local and international organizations to design a program, which includes a significant training component, for serving its own members. The right to be a legal entity: local governments are legal entities and may exercise all the rights set forth in the Civil Code of the Republic of Albania and in the current legislation in force. Local government units have the right to make contracts, to establish other legal entities, to bring a civil court case, to keep accounts and to carry out other functions in compliance with the laws and normative acts. All local government bank accounts are in the state treasury. The right to open bank accounts is expected to be given in the long-run. Other rights: local governments may grant honorary titles as well as other moral and material motivations. Each local government can name the territories, objects and institutions under its jurisdiction in accordance with the criteria set forth in law. This law expresses the rights of the local governments clearly. 114
LOCAL GOVERNMENT BUDGETING ALBANIA Figure 1.1 The Organizational Structure of Local Governance and the Responsibilities of their Respective Bodies Municipality/ Commune Region Some municipalities and communes with geographic, traditional, economic, social ties, etc. Municipality/ Commune Municipality/Commune Territorial and administrative integrity and community of inhabitants Representative Council of Municipality/Commune Approves the status of commune/municipality; Approves the organizational structure of commune/municipality; Approves the founding documents of enterprises and commercial companies; Approves the budget and its changes; Establishes the local taxes and tariffs and their level; Makes decisions about taking loans; Approves the disposition of property or its giving for use to third parties. Executive Mayor/Head of Commune All the competencies that are not covered by the council; Implements the council decisions; Reports to the council for the economic financial situation (at least once in six months); Nominates and relieves deputy mayors/ directors of enterprises/employees that are not under the civil service law; Ensures all the obligations of the municipality as a legal entity. Administration of Municipality/Commune Subdivisions of Municipality/Commune Quarter Administrative apparatus; Administrator civil servant directly subordinate to the mayor; Carries out all the administrative duties given by the mayor and the municipal council. Village The council of the village is elected by voting of not less than half of the eligible inhabitants; Head of the village is nominated by the council; Elections held every three years, not later than six months after commune elections; Head of the village and the council support the functions of the commune in their village. 115
LOCAL GOVERNMENT BUDGETING PART II Figure 1.2 Bodies at the Regional Level Regional Council Adopts the statute and internal regulations concerning the functioning of the council; Decides on the obligatory taxes for each commune and municipality to be transferred to the regional budget; Adopts the organizational and administration structure and main regulations of the regional administration; Approves the foundation documents of the legal entities created by the regional council or in which it is a co-founder; Approves and amends its budget; Approves transfers of ownership (sale, purchase, disposition) and rental of its immovable property to third parties; Implements and supervises the internal control of the region; Decides rates of all taxes and tariffs (fees); Decides to take on and liquidate obligations to third parties; Approves any legal proceedings instituted in its name; Adopts norms, standards and criteria for the regulation and enforcement of functions granted to the regional council by law, as well as protects and guarantees the public interest on a regional level. Chairman Approves any legal proceedings instituted in its name; Presides over the regional council meetings and its board; Signs all acts of the council and its board as well as minutes of the council meeting and its board; Ensures the enforcement of decisions of regional council and its board; In compliance with the agenda of the regional council meeting and its board, shall prepare reports, draft decisions and produce other necessary materials; Manages the administration of the region and is accountable to the regional council for its functioning; Hires and dismisses the administrative staff of the regional council, with the exception of the cases otherwise described in the Law No. 8549, dated November 11,1999 concerning Civil Servants; Guarantees the execution of functions of regions defined by law. Board Approves any legal proceedings instituted in its name; The board shall exercise all the functions and competencies of the regional council, with the exception of those which have been clearly and exclusively granted to the regional council; Reports to the council on the economicfinancial situation no less than every six months or when requested by the council; Reports to the council at any time as requested by the council; To exercise its responsibilities, the board may issue decisions, which are approved by the majority of the members attending and which are effective after being published or after the affected parties have been notified. Regional Administration 116
LOCAL GOVERNMENT BUDGETING ALBANIA 1.3.3 Relations to the Central Administration Role of Line Ministries The line ministries have significant responsibilities concerning investment at the local level. The conditional transfers (conditional local budget) are made available to the local level by the line ministries (these funds are also part of budgets of the line ministries). In the law concerning the state budget, the investment funds are determined in total for each line ministry (not specifically for each project). The subsequent allocation of funds to specific projects depends on the interest of the ministry, independent of the requests from local governments submitted during the budget preparation process. These funds are used for very specific purposes and are determined and distributed by both the line ministries and the Ministry of Finance. The local government has no right to make decisions concerning these funds or to allocate them to other than their stated purpose. The relations between the local governments and the line ministries are through the Ministry of Finance. (It is expected that the new Law on Intergovernmental Fiscal Relations will define the procedures and establish the related timetable regulating the negotiations between the local governments and line ministries concerning conditional transfers. These are planned to be effective by 2003. This process will increase the role of local governments and enable them to prepare a consolidated budget before the next fiscal year begins.) The role of line ministries is significant even in the administration of the local enterprises that provide public services. The term enterprise means that the entity has a semi-autonomous structure with a separate director, budget and staff. Among these enterprises are those responsible for the waste, water and sewage systems, transportation, etc. Key management and financial decisions are made by the line ministries which have functional responsibility for the sector and by the Ministry of Finance. In most cases, they decide on the number of employees, on the maintenance and investment priorities and on budgets for each enterprise. The Ministry of Finance sets public sector salaries for all employees, including those working directly for local enterprises. The state also retains ownership over all physical assets of the enterprises. Many of these of enterprises are now being privatized in order to improve the efficiency of service provision. The line ministries control the privatization process as well. The central government is represented at the local level. The Ministry of Finance has local offices at the district level for controlling and assessing the state operating and investment funds. These offices exercise considerable oversight concerning local finances. The Budget Office is the local governments counterpart during the preparation of their budgets for central approval. All local government finances, including revenues from local taxes and fees are held in an account administered by the local 117
LOCAL GOVERNMENT BUDGETING PART II treasury offices. At the local level, the Ministry of Finance also has a tax department responsible for collecting both national as well as some the local taxes. Certain ministries, such as the Ministry of Education and the Ministry of Agriculture and Food, also have local departments in order to implement their policies. Role of Prefecture A prefectural system also represents a second level of the central government. The twelve prefectures in Albania cover all the territory. Each contain a specific number of munici-palities and communes. Based on law, the prefect controls the implementation of decisions made by local governments. In addition, the prefecture has certain responsibilities during the local budgeting process. (Recently, a new administrative structure was established. It is similar to a prefecture and controls the use of funds by local governments.) 1.4 Local Government Functions and Service Delivery 1.4.1 Municipal Functions and Competencies The current legal framework determines the functions and responsibilities for each local government level and establishes which of these functions are exclusive, shared or delegated functions. Exclusive Functions of a Commune and Municipality The law assigns exclusive functions to local governments. To carry out these functions, the local government has the authority to make decisions and use methods allowed within the norms, criteria and standards generally accepted by law. Local governments exercise full administrative, service, investment and regulatory authority over these functions. They can decide about the planning, distribution, extension, investments, norms, standards, financing, administration and other aspects of carrying out these functions. Following are the four main categories of functions: 11 Infrastructure and public services: Water supply; Sewage, drainage system and [flood] protection channels in residential areas; Construction, renewal and maintenance of local roads, sidewalks and squares; Public lighting; Public transportation; 118
LOCAL GOVERNMENT BUDGETING ALBANIA Cemeteries and funeral services; City/village decoration; Parks and public spaces; Waste management; Urban planning, land management and housing according to the manner described by law. Local economic development: The preparation of programs for local economic development; The setting (regulation) and functioning of public market places and trade networks; Small business development as well as the carrying out of promotional activities, such as fairs and advertisements in public places; Performance of services to support local economic development, such as the provision of information, necessary structures and infrastructure; Veterinary services; The protection and development of local forests, pastures and natural resources of local character. Social, cultural and recreational functions: Saving and promoting the local cultural and historic values, the organization of activities and the management of relevant institutions; Organization of recreational activities and the management of relevant institutions; Social services, including orphanages, day care, homes for the elderly, etc. Civil security: The protection of public order to prevent administrative violations and to enforce the implementation of commune or municipality acts; Civil security. The Law on Intergovernmental Relations proposes that the central government issue national standards that the local governments are exclusively responsible for achieving. The national standards represent minimum requirements to protect the public from specific and urgent risks to health and safety. They are to be applied uniformly to general categories of local governments, such as municipalities, communes and regions. Shared Functions According to law, communes or municipalities may undertake shared functions either separately or jointly with the central government, when this is required in order to ensure achievement of a national standard for that service. Competencies of communes/ municipalities for these functions as well as the relations between the local govern- 119
LOCAL GOVERNMENT BUDGETING PART II ments and the central government will be regulated in each case by specific laws and regulations, which have yet to be issued. Beginning in January 2002, communes and municipalities may undertake any of the following shared functions: 1) Pre-school and pre-university education; 2) Preventative healthcare services and the protection of public health; 3) Social assistance, poverty alleviation, and the functioning of the related institutions; 4) Public order and civil protection; 5) Environmental protection; 6) Other shared functions as described by law. Up to now, regarding their shared functions, local government units have only carried out the maintenance operations in and the supply of equipment to the institutions, which have shared functions and which are financed through block grants given by the central government. The Law on Intergovernmental Fiscal Relations proposes that, to the extent not otherwise specified by law, the central government may require a local government to undertake a shared function jointly or independently, provided that the local government and the central government first agree on the following matters: a) The tasks to be performed by the local government. b) The required methods and procedures for carrying out these tasks. c) The respective financial obligations of the local government and the central government for performance of the tasks. Delegated Functions Delegated functions are functions of the central government or other central government institutions that, by law or by a contractual agreement between the central government and the local government unit, are assigned to the local government for performance in a manner and to a degree determined by the central government or other central government institutions. In any case, the central government guarantees necessary financial support to the local government units to exercise delegated functions and powers. The local government units may, at their own initiative, commit their own financial resources to the performance of delegated functions in order to achieve a higher level of service in the interest of the community. According to the local government, delegated functions can be either mandatory or non-mandatory. If they are mandatory, they must be explicitly described as such in a law. The law should also clearly and fairly determine the necessary funds for carrying out this function and the way these funds are going to be transferred or disbursed to 120
LOCAL GOVERNMENT BUDGETING ALBANIA the local government account. In the case of non-mandatory delegated functions, there should be a mutual agreement between the commune/municipality/region and the central government authority. According to the draft Law on Intergovernmental Fiscal Relations, a local government may cease the performance of a non-mandatory delegated function at the end of the time period specified in the agreement, provided that, if an agreement extends beyond the fiscal year, the local government shall notify the central government of this at least ninety days prior to the time period specified in the agreement. If an agreement does not extend beyond the end of the fiscal year, the local government may terminate the performance of the function at the end of the fiscal year without prior notification of the central government. 1.4.2 Functions and Competencies of the Region The region, as a local government unit, has its own functions that consist of developing and implementing regional policies, of harmonizing these with the national policies at the regional level and of any other exclusive functions given by law. In addition, each region may perform any functions delegated to it by one or more communes or municipalities within the region, according to an agreement between the parties. The region can also perform functions delegated to it by the central government. The central government may delegate a function to the region if it guarantees the region financial support for the provision of this function. The function cannot be delegated without a law or a mutual agreement. Until now, the law has assigned more functions to municipalities and communes than to regions. Therefore, it can be said that municipalities/communes have a stronger position. On the other hand, regions are very new units of local government and it can be expected to take some time to define their profile. As a new administrative structure, the regions are in the process of establishing the appropriate staff. The role of the region is more specific, for example, in the case of communes since they do not have sufficient budgets for the maintenance, repair and construction of rural roads. Under the administration of the region, there is the Rural Road Enterprise that is responsible for managing funds for the rural roads. It administrates about 177 km of national rural roads, but its budget does not contain the item investment. It was established at the beginning of 1999 and is in the process of setting up the administrative structure. Until now, this enterprise did not possess sufficient assets and staff (administrative and workers) to implement the project by itself. A third party performed the job on a contractual basis. An inventory of the rural roads is in process. It is estimated that there are about 270 km that are currently under the administration of communes. Considering that 121
LOCAL GOVERNMENT BUDGETING PART II communes do not have technical staff or even a procurement commission for construction projects, it is under discussion that the entire rural road network be administrated by the above-mentioned enterprise. Currently, the remainder of rural roads are under commune administration. Due to a lack of funds, the infrastructure situation in rural areas is bad. If additional funds are needed to repair a road or construct a bridge, a commune must submit a formal request to the region s council. If the region s council approves it, the request goes to the Ministry of Local Government, which again submits it to the Council of Ministers in order to be included in the next year s budget for public works. If the funds are approved, they are channeled to the respective Rural Roads Enterprise. In the region of Tirana, there was a case where some funds were allocated directly to communes to improve road infrastructure. However, this action seems to be more of a political action than a real financial support to the commune. Table 1.2 below shows the structure of local expenditures by functions: Table 1.2 Total Expenditure by Functions [%] Functions 1996 1997 1998 1999 99/96 Education 47.59 32.65 41.51 39.78 42.51 Health and social 34.93 20.91 36.42 34.41 67.97 Public services 6.622 6.439 10.53 9.481 144.14 Administration 8.252 38.16 9.081 15.23 214.61 Culture and sports 2.602 1.839 2.455 1.107 27.44 Total 100 100 100 100 70.51 1.5 Local Government Finances and Financial Management Local government budgets have two main revenue sources: own revenues and central transfers. (Borrowings also exist in principle, but they cannot be considered as revenue.) The relation between the two is shown in Table 1.3). 122
LOCAL GOVERNMENT BUDGETING ALBANIA Table 1.3 The Revenues of the Municipalities [%] 1996 1997 1998 1999 Total 100.00 100.00 100.00 100.00 A Own revenues 3.78 1.72 2.76 3.70 B Transfers 96.22 98.28 97.24 96.30 1 Conditional 96.22 98.28 97.24 86.60 2 Unconditional 0.00 0.00 0.00 9.70 A. Own Revenues Communes and municipalities may generate revenues from local taxes and local fees as well as other sources defined by law. Table 1.4 shows a breakdown of these. Table 1.4 Revenues from Local Taxes and Fees [% of Total Revenues] 1996 1997 1998 1999 Total revenue 100.00 100.00 100.00 100.00 Own revenue 3.78 1.72 2.76 3.70 Of which taxes 0.50 0.32 0.43 0.97 Local fees 2.55 1.17 1.96 2.49 Other revenues 0.73 0.23 0.37 0.24 Local Taxes local taxes and levies on movable and immovable property, as well as on transactions related to them; local taxes and levies on the economic activity of small businesses and on hotel occupancy, restaurants, bars and other services; local taxes and levies on the personal income derived from donations, inheritances, wills and from local lotteries; other taxes and levies set by law. 123
LOCAL GOVERNMENT BUDGETING PART II The analysis of the fiscal situation of local governments in Albania up to 2000 shows that the tax base and tax rates have always been set in a separate law approved by the Albanian Parliament, with the local governments having no right to make changes or to not implement any of them. This situation is still present, even though the Law on Local Government has determined that beginning on January 1, 2001, communes, municipalities and regions have the option to not implement a local tax, as defined by law, in its jurisdiction. (A new law is in process and it is expected that a new framework regarding the fiscal authority of local governments will be ready by next year.) User Charges The Law on Local Government defines the right of local governments to generate revenues from local fees for: public services they provide; the right to use local public property; the issuance of licenses, permits, authorizations and other documentation given by the local government. Beginning January 2001, they have full authority to set local fees and the method for their collection and administration, in compliance with the general national policies and principles (see table in Annex 1). Other Sources of Local Government Revenues Local governments are entitled to generate revenues from their economic activity and from the rental and sale of property. Although this opportunity is determined by law, they are not present in practice. Fines are another source of local revenues. However, the corruption of civil servants and especially the lack of a municipal police force have made it difficult to collect fines. Gifts, aids or donations are not directly linked to the local inhabitants (taxpayers) and are not permanent sources. They do not have a significant effect on total local revenues. Furthermore, grants and donations are given in kind (equipment, computers, etc.) mainly for improving job conditions. However, there are a number of foundations and international organizations operating currently in the country, which provide funds to local communities to improve public services. The Albanian Development Fund is one of the most active. 124
LOCAL GOVERNMENT BUDGETING ALBANIA B. Central Transfers and Shared Taxes Conditional Transfers Central transfers represent 90% of the local revenues in which conditional transfers dominate. The amount is decided each year in the State budget law, as part of the line ministries programs that are to be implemented at the local level. The bulk of conditional transfers across sectors has been allocated to the education sector, which prior to 2000 received more than 40% of all conditional grants. Local governments do not have a chance to influence decisions on the targets for these grants. There are several limitations and specifications for using them exclusively for earmarked projects. The line ministries plan local expenditures as well, but they are only based on some standards that are not linked to the local conditions and needs. Furthermore, there is only limited consultations with local governments. The legal framework (the Law on the State Budget and on the Local Budget) was not clear about the role of transfers, the method or the criteria for their calculation. According to the National Strategy of Decentralization, conditional transfers will shift gradually from strict conditions and small projects to more general conditions and larger projects and sectors. It is expected that considerably greater resources will be put under the control of local governments. This would alter the vertical imbalance over resources. Existing conditional transfers for specific expenditure items such as salaries and investments could take the form of block conditional transfers (and not specified by item). However, since the education and health expenditures can have important spillover effects and they are key tools of the central government to alleviate poverty, conditional grants would be still used in these fields. After several years, they may be converted to block allocations with spending limited to a particular sector, but without the line ministry determining exactly where they are to be spent. Unconditional Transfers From March 1998, part of the central transfers has been provided as unconditional transfers to fund operating expenditures and certain investments (reconstruction and maintenance). According to the National Strategy of Decentralization, the unconditional transfer will include the following: A transfer of vertical compensation based on the ratio of responsibilities and functions between the central authorities and local ones to be used for general and non-targeted support of expenses for public services and functions of local government. 125
LOCAL GOVERNMENT BUDGETING PART II Equalization grants to support those local governments that have an insufficient local revenue and resource base. For an undefined period, the total amount of unconditional transfers will be decided each year in the State Budget Law. This is because the dynamics and instability of public finances makes it impossible to define a unique formula connecting the value of the unconditional transfers with the total of the state budget expenditures. Shared-Taxes Until 1998, the tax on property (on land and buildings) was a shared-tax divided between the central and local government in a ratio of 40/60%. This tax has only been partially implemented: for the tax on building. Since May 1998, the tax on property has become a local tax since no shared-tax exists Albania. The National Strategy of Decentralization recommends that: 15% of total annual incomes from personal income taxes and 5% of total annual revenues generated from corporate taxes be transferred to local governments unconditionally. This revenue sharing will be effective by 2003. C. Borrowing From January 2002, local governments have the right to borrow for project investments. The previous law declared that local governments only had the right to borrow from the state budget in order to finance investment projects, but this provision was never implemented for several reasons (mainly due to a lack of regulations and a lack of a law on local government properties). The Law on Intergovernmental Fiscal Relations proposes that, with the approval of the Ministry of Finance, the total annual amount of debt service of a local government may not exceed 10% of the total annual revenue, excluding conditional transfers and revenues from asset sales. D. Revenues of the Region Regions shall obtain their financial resources from regionally generated revenues (regional taxes, regional fees, others) and from national sources (shared national taxes, unconditional transfers, conditional transfers) in a way similar to that of communes 126
LOCAL GOVERNMENT BUDGETING ALBANIA and municipalities. In addition, they obtain fees from the services they provide. Since the region was established only a few months ago, the needed regulations are in process. Accurate and comprehensive statistics do not exist. 2. LOCAL GOVERNMENT BUDGETING (FISCAL PLANNING) According to the Albanian Constitution, principles and procedures of draft budgets as well as of their implementation are defined by law (Article 159). The preparation of central and local budgets is based on principles defined by the Law for Preparing and Implementing the State Budget in the Republic of Albania, No. 8379, dated July 29, 1998. According to this law, the state budget is the annual financial program. It constitutes funds determined in the law, is approved by the Albanian Parliament and includes all revenues as well as expenditures of central and local governments. The Ministry of Finance determines the policies, procedures, parameters and terms that all budgetary institutions (both central and local) have to use in order to prepare draft budgets. Every year at the beginning of July, the Ministry must issue instructions. There is a timing difference between the approval process of the state and local budgets. Local authorities cannot give the final shape to their budgets until the central transfers are approved in the annual state budget (by late December). Only after approval of the central budget can local authorities re-approve their budget for the next year. 2.1 Strategic Planning and Short-Term Budgeting at the Local Level So far the practice of local budget preparation has shown that the local budget is only an expenditure plan designed to fulfill the most urgent needs of the community. The opinions or decisions of local officials were the only inputs to the local budgets. However, the issue of preparing development plans is in focus in many cities. Supported by foreign experts or assisted by Albanian organizations, they have conducted a strategic planning process and prepared short- and medium-term development plans. A USAID-funded project (PAPA) and the Institute for Development Research and Alternatives (IDRA) have assisted several municipalities in the preparation of these plans. One of the significant aspects of this process was that it was participatory in nature, with the work coordinated by a specific commission consisting of governmental institutions at the local level and all interested groups in the community. Local governments are solely responsible for the preparation of development plans. (Standardizing this process and the related forms would be helpful to the municipality, 127